Do markets value companies’ social and environmental activity? An inquiry into associations among social disclosure, social performance and financial performance

Murray, Alan
(2010)
Do markets value companies’ social and environmental activity? An inquiry into associations among social disclosure, social performance and financial performance.
PhD thesis, University of Glasgow.

Abstract

In the context of a changing world, and faced with a scientific analysis that unequivocally links corporate activity with climactic changes which might threaten humankind, any study of financial reporting needs to be placed in perspective. If the science is correct, then it is the contention of this thesis that capital market activity is complicit in the destruction of the Earth’s biosphere and that accounting, in terms of the rules that govern corporate activity and the financial reporting, is an essential link in this chain. Previous research has sought to demonstrate links among social disclosure, social performance and financial performance and this thesis seeks to extend that literature by conducting two further studies, not to aid investors in their quest for further abnormal returns, but to understand the potential for financial markets to contribute to responsible business practice and the quest for sustainable development.
The first study was a statistical examination of the relationships between social and environmental disclosures and market performance of the UK’s largest companies. It utilised longitudinal and cross-sectional data over a 10 year period and was tested for linear and non-linear relationships. As expected, no direct relationship between share returns and social disclosure was detected but, on further examination, the longitudinal data revealed a relationship between consistently high (or low) returns and a predisposition to high (or low) disclosure.
The second study was a qualitative, interview based inquiry into what companies report in terms of social and environmental information and how markets gather and utilise that information. Senior executives from twelve FTSE companies were interviewed to gain an understanding of why this practice had grown so significantly over the last two decades, who their intended audience might be and the place such information had in their interactions with capital markets. Thereafter, senior executives from three Mutual Assurance Companies were interviewed to seek an understanding of the nature of information they required, and upon which their investment decisions were based.
The findings of this study confirmed that social and environmental issues are of limited interest to markets except where they can be identified as relevant in terms of risk or governance. It also confirmed that there is a strong PR motivation in releasing social and environmental reports, which has little to do with improving social performance. On the market side there was confirmation that financial returns, even in ethical funds, were the main driver behind portfolio selection.
The rather depressing conclusion from these studies is that serious moral and ethical issues are eschewed by companies and markets alike, where the focus remains on short-term performance measures.